Morningstar | FirstEnergy Reports Solid 2018 Results, but DMR Extension Unlikely
We are reaffirming our $40 per share fair value estimate after FirstEnergy reported solid 2018 operating earnings, reaffirmed 2019 earnings guidance and 6%-8% annual earnings growth through 2021, and provided updates on several regulatory proceedings. FirstEnergy reaffirmed its 2019 earnings guidance of $2.45 to $2.75 per share, and our $2.60 estimate is unchanged.FirstEnergy reported 2018 operating earnings of $2.59 per share, $0.04 higher than our estimate and $0.05 above consensus. The distribution segment was the primary source of the positive variance versus our estimate, driven by favorable weather and strong weather-normalized sales growth. Although we remain concerned about the impact of lower oil prices on exploration and production and a slowdown in the steel industry, industrial sales continue to track favorably and were up 1.4% in the recently ended quarter.
Settlement discussions for Ohio’s $516 million grid modernization program and the approximately $400 million of investment associated with the JCP&L Reliability Plus initiative in New Jersey are a positive, in our opinion. Both indicate improving regulatory climates in these jurisdictions.
Earlier this month, FirstEnergy’s three Ohio utilities requested a two-year extension of the Distribution Modernization Rider. We suspect Ohio regulators will take notice of the solid 2018 earnings, recent upgrades by credit rating agencies, the voluntary cash contribution to the company’s pension plan, and increase in common dividend. In our opinion, this will make it less likely that the DMR will be extended beyond 2019 as the purpose of the rider was to help FirstEnergy strengthen its balance sheet before the separation from bankrupt FirstEnergy Solutions.
For more detail, see our report "FirstEnergy: Life After FES Bankruptcy."
FirstEnergy is a public utility holding company. The company and its subsidiaries are principally involved in the transmission, distribution and generation of electricity. The company's reportable operating segments are comprised of: Regulated Distribution, which distributes electricity through the company's utility operating companies and also controls regulated electric generation capacity located primarily in West Virginia, Virginia and New Jersey; and Regulated Transmission, which provides transmission infrastructure owned and operated by the transmission companies and certain of the company's utilities to transmit electricity from generation sources to distribution facilities.
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